The Meridian is the official blog of Scott Dauenhauer and Meridian Wealth Management. This blog will update you on financial planning and investment management topics. It will also explore the impact of world events on your portfolio.

Friday, February 05, 2010

Note To Krugman and Reich: Deficits Matter and Its Not Political

I talk to a lot of people. Some are clients, others are pension committee members, some work for brokerage firms, news organizations, mutual fund companies and some run their own businesses. These people are Republicans, Democrats, Independents, Conservatives and Liberals. There is one thing that has seemingly united them, though you wouldn't know by today's opinion pieces in the New York Times (Krugman) and the Wall Street Journal (Reich) - its the deficits.

You see, most people I talk too realize that you can't spend money you don't have or generally agree that burdening future generations with this generations debt is wrong. These people are concerned. They are concerned about our massive deficits and our massive national debt. Yet today both Paul Krugman and Robert Reich in a Dick Cheney moment (yes, the irony is striking) both essentially said that deficits don't matter and what is needed is more spending in order to pull us out of our financial crisis.....which was caused by overspending and too much leverage. Really?

Here is the economic rational. John Maynard Keynes is credited (rightly or wrongly) with the idea that government should pick up where consumers and business left off in spending during recessions in order to lessen the recession and put the country back into a growth mode. So when a recession hits and spending drops, the government should borrow or print money to cover the shortfall - then spend that money to keep the economy growing. When things improve that money can be paid back.

Here's the problem with that way of thinking: the money is never paid back, ever. In addition, why does the economy have to grow no matter what? Shouldn't excess be wrung out? Consumer spending was in a bubble, much of the excess was due to money being borrowed on credit cards and from homes, it was unsustainable. If the spending was unsustainable to begin with, why should the government step in to sustain it (furthermore, how does the government know what the right level of spending is?)? How is the consumer going to make a come back to those unsustainable levels - they can't, thus government spending will not be temporary and the deficits will rise not fall and never be paid back.

Deficit spending isn't always bad, but it certainly DOES matter and especially now when our nation has become so over-leveraged. The idea that we aren't spending enough or running large enough deficits, or that we will address the deficits later is so ridiculous as to make one wonder if Krugman and Reich thought they were penning articles for The Onion.

The Bush administration ignored deficits and there was some rational, we had been attacked and were at war, however they went to far and took advantage of it. Republicans spent so much money that the saying "spending like drunken sailors" became obsolete (that is "sailors" was replaced with "congress"). The Democratic congress has been no better. As long as people believe that Deficits Don't Matter we will continue on a collision course with a destiny none of us want to imagine.

It seems to me the people get it, regardless of their political affiliation, class, color or religion - the one's that don't are our politicians and of course Krugman and Reich.

The US can't default on their debt, technically, but continuing on believing that deficits don't matter and that government must always pick up the slack is a recipe for continued boom-bust cycles that end up hurting Americans and eliminating jobs.

I'm not saying balancing the budget will solve our problems, its much deeper than that, but a sound fiscal policy with sound financial institutions is what we need in order to place our nation back on the path to sound growth. We've waited to long to do this and now the pain will be much worse when we finally adjust, but it will be better than living in a country that is chronically in pain.

As for Krugman's belief that the deficit hawks are only about politics and trying to elect Republicans....perhaps he should listen to everyday people, who feel the same way as I do and who are scared to death to elect a Republican or Democrat because they see little difference.